Multinationalization of the Firm - Essay Example

Multinationalization of the Firm, Outsourcing and Intra industry trade on Factor Price Equalization Introduction The essay will discuss the impact of Multinationalization, outsourcing, and intra industry trade on factor price equalization. The essay will cover a brief literature review on all four concepts and then a discussion will be carried out to explain the impact. Literature Review In this section the essay will cover literature review of four separate concepts. After the literature review the impact of these concepts on factor price distribution will be discussed. Multinationalization of the firm A multinational or international firm can be defined as a company that trades in more than one country. This trade could be providing products or services. Usually these firms have their headquarters in their home countries from where main decisions are made, and their operations are expanded to several other countries. (Markusen and Venables) Over the years there has always been a conflict on defining these corporations in one way. One of the definitions declared Multinational enterprise as “An enterprise that engages in Foreign Direct Investment (FDI) and owns or controls value adding activities in more than one country”(Dunning and Lundan) The phenomenon of Globalization has affected the Multinationalization of firms a lot. Now that the products, services, and customers are not limited to one region, the companies are attracted to expand their operations globally in order to gain extra profits. Outsourcing The term outsourcing is relatively new compared to other literature of economics. Few decades ago, organizations believed to do everything by themselves. It was all part of value chain. However in the late 80’s the concept of outsourcing came into the market. Which was to outsource one part of the business to a third party.(Quinn) this step was considered necessary either to save costs or to make the overall operations more efficient. It was also viewed as a tool which could help an organization focus on the core business. (Feenstra and Hanson) Basic concept of outsourcing is to make a contract with another organization or supplier to become part of the value chain by providing a product/service to make operations of the organizations more effective and efficient. Intra industry Trade Intra industry trade is an interesting concept, which means trade of goods and service of a similar kind. In simple words it can be defined as exchange of similar products for import and export. The term is usually used in international trade and means when a country export and imports similar products and services at the same time. (Grubel and Lloyd) The concept is very interesting because according to scholars an explanation can’t be found for the idea. It is hard to say why countries export and import identical commodities. (Grimwade) Some researchers recommend that such trade is carried out so that countries can take advantage of high returns that is associated with such trade. (Krugman) It can be said that such trade is carried out to satisfy the variety needs of the customer. For instance it may be amusing that a country import the same amount of cars that it exports, but it may not be that amusing when coupled with the fact that it exports the cars locally made and import expensive/branded cars that other countries make to satisfy consumer needs. Factor price equalization Factor price equalization is a concept that is also affected by globalization in recent decades. The concept is an economic theory which states that prices for two identical factors of productions are likely to become equal when they are in the same market. These factors of productions could be any component of the economy which ends up in the same market and their relative prices become equal. They are not necessarily suppose to be completely equal to each other by having the same prices, but this could happen in a way that price of one factor falls and become equal to the other. This concept was given by Hecksher-Ohlin model, which states, “when the prices of the output goods are equalized between countries as they move to free trade, then the prices of the factors (capital and labor) will also be equalized between countries.”(Heckscher and Ohlin) Impact of Multinationalization, Outsourcing and Intra-industry trade on factor price equalization Since all these factors have been discussed with a view of globalization, we will discuss their impact in terms of globalization as well. Multinational firms, outsourcing and intra industry trade are very much born to globalization. Firms started becoming multinational at the very start when they outsourced their operations of production to other countries. These outsourcing were merely to decrease their costs and increase their profits. However this eventually led the firms to realize that other markets exists in different countries. The same countries where firms were only outsourcing only, they started their other operations as well. The concept of intra industry trade came after consumers were able to access products and services without borders. Labor, products, and services were exchanged between countries and economies to create international markets. These concepts led to creation of free trade agreements, countries unions, and tax free economies. Now we will see how these all concepts have their implications on factor price equalization. Factor price equalization diminishes international differences in relative factor prices. This impact can be positive and negative. For instance a very common example given for the impact is the wages of American after the free trade agreement. Although the prices of Mexican labor rose to a certain point after the agreement, the wages of American labor were lowered (Charnovitz). However discussing the negative impact is also apparent that it also has positive impact such as developing countries can compete with developed countries due to the factor price equalization. It is also beneficial for the consumer as products and service are available to them cheaper due to international competition and intra industry trade. Outsourcing effects the model as well, as outsourcing is not only in terms of product now. Outsourcing of labor is a very common concept these days. Multinational firms are outsourcing their operations to the countries where labor is cheap. The model effects the factor price equalization as labor ether get very good rates of pay (paid by multinational firm to the country where they are outsourcing) or they get a lower rate (if company is hiring in their home country) as multinational firms always have the option to move operations to cheap labor countries. Intra industry trade has made the countries and economies to come together and made agreements which resulted in European Union, North American free trade agreement, and south Asian association for regional cooperation. The intra industry trade is much easier now and is affecting prices of products in all participating countries. The example of labor prices in America and Mexico make a very good case to understand its impact on factor price equalization. Conclusion It is hard to cover the impact of all three aspects on factor price equalization in one essay. However it can be said from the above discussion that the theory exist without a doubt and is greatly effected by all three factors. It may has some negative effects but from the point of view of developing economies it is surely beneficial. As they can compete with the developed countries and economies. It is also beneficial for the end consumer to be able to get services and products at a cheaper rate. References Charnovitz, S. "Influence of International Labour Standards on the World Trading Regime-a Historical Overview, The." Intl Lab. Rev. 126 (1987): 565. Print. Dunning, JH, and SM Lundan. Multinational Enterprises and the Global Economy. Edward Elgar Pub, 2008. Print. Feenstra, RC, and GH Hanson. "Globalization, Outsourcing, and Wage Inequality." The American Economic Review 86 2 (1996): 240-45. Print. Grimwade, N. International Trade: New Patterns of Trade, Production & Investment. Routledge, 2000. Print. Grubel, HG, and PJ Lloyd. Intra-Industry Trade: The Theory and Measurement of International Trade in Differentiated Products. John Wiley & Sons, 1975. Print. Heckscher, EF, and B Ohlin. "Heckscher-Ohlin Trade Theory." (1991). Print. Krugman, PR. Geography and Trade. the MIT Press, 1991. Print. Markusen, JR, and AJ Venables. "Multinational Firms and the New Trade Theory." Journal of international economics 46 2 (1998): 183-203. Print. Quinn, JB. "Strategic Outsourcing: Leveraging Knowledge Capabilities." Sloan Management Review 40 4 (1999): 9. Print. Read More